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A multi asset approach to ESG integration

M&G Investments’ Maria Municchi and Marie-Benedicte Senou highlight how ESG integration can become more complex when combining asset allocation and investment decisions in multi asset strategies

Significant growth of ESG integrated strategies

Over the course of only a few years, economic, social and governance (ESG) integration has become a mainstream feature of investment funds.

Together with regulatory requirements, the availability of ESG-relevant data and clients’ demands have driven a shift towards the inclusion of financially material ESG parameters across many investment strategies.

At the same time, broad standards of ESG integration approaches have been identified, especially for equity and corporate bond investing. However, when it comes to combining top-down and bottom-up investment decisions, as well as assessing a variety of asset classes within the same strategy, such as in multi asset strategies, ESG integration can become more complex.

The broad set of investment decisions found in multi asset strategies have a variety of ESG integration implications:

  • Strategic and tactical asset allocation decisions:

ESG factors can be financially material to asset allocation decisions, but the time horizon over which they are relevant may vary.

  • Top-down and bottom-up investment decisions:

ESG factors can be financially material across asset classes both at the aggregate and the single stock level, but the way this is assessed may vary.

A view from the top on ESG factors

As multi asset investors, our aim is to allocate capital across asset classes according to their risk and return characteristics, while considering the current macroeconomic trends. Economic activity, demographics, monetary and fiscal policies are some of the key determinants of the macroeconomic background we operate in. However, ESG factors also have an important role to play; these can alter economic beliefs and shape the risk and return characteristics of the investments we make. Therefore, when assessing the asset classes we invest in, we believe it is important to incorporate the different levels of ESG risks and opportunities that characterise them.

Today, we observe how the current economic and social environment is being increasingly impacted by sustainability trends (climate change risk and mitigation being one aspect of it), making ESG factors ever more relevant.

ESG integration within the investment process

ESG integration needs to be ‘explicit and systematic’ and therefore embedded within the investment process. ESG factors remain relevant throughout the four-step investment process – from the asset allocation, to the portfolio construction, the implementation phase and overall portfolio analysis.

Asset Allocation: We consider financially material ESG factors alongside other investment criteria at the asset class level. For example, when investing in emerging market sovereigns we take into account the fact that ESG risk might be higher than developed market sovereigns. This, together with other investment criteria, might lead to higher volatility but also higher expected return.

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